A Baby Boomer looks at health, finance, retirement, grown-up children and ... how time flies.

Sunday, March 11, 2012

Can You Finally Sell Your House?

Recent reports tell us that the news on home sales is still bad ... but it is apparently getting a little better.

According to a report from the Associated Press, "In January sales of previously occupied homes reached their highest level in nearly two years, and they have risen more than 13 percent in the past six months."

The National Association of Realtors agrees, saying that in January sales rose for the third time in four months. The NAR also reports that existing home inventories have been trending down from their record high of 4.04 million in July 2007. Currently home listings stand at 2.31 million units, which is 20 percent below a year ago.

Lawrence Yun, NAR chief economist, said strong gains in contract activity in recent months show that buyers are responding to favorable market conditions. “The uptrend in home sales is in line with all of the underlying fundamentals – pent-up household formation, record-low mortgage interest rates, bargain home prices, sustained job creation and rising rents.”

Unfortunately, the average price of an existing home has fallen some 2 percent since last January. And so-called distressed homes -- ones in foreclosure, or short sales -- still comprised 35 percent of January 2012's home sales, down just a hair from 37 percent in January 2011.

I assume most people in our age bracket are more interested in selling their old home than in buying a new one. But, really, we only want to sell because we want to move ... and many might wonder, if I can sell my old house, should I buy another one, or just rent for a while?

So let's look at the idea of buying a home from a broader perspective.

Despite the bust of the last six years, most of us Baby Boomers have probably had good experiences owning our homes over the course of our lives.

For most of us -- and for our parents as well -- the rationale for owning our own home centered around the American dream, the white picket fence and the friendly neighbors. Owning a home placed you in a community, provided a school system for your kids, and gave your family a stable lifestyle. And in the long run, everyone told us, it was a good financial decision as well. The mortgage was tax deductible; your real-estate taxes were tax deductible; and over the years the value of your house would increase -- some years more than others, but except for a few brief recessionary periods, always on an upward trajectory. The rule of thumb was that is was better to own than to rent, as long as you were going to stay in the place for at least five years.

But that was then. What about now? Some people argue that owning a home is not all it's cut out to be, that people are better off renting. These days, it seems, people seem more interested in mobility than stability. They want to be able to retire to a warmer, less expensive place. But they can't sell their house. Or they want to be able to move somewhere else to take a better job. But their mortgage is under water. Meanwhile, local taxes keep going up, our utility bills keep going up, and the traffic just keep getting worse.

I saw a report of a single woman in her early 30s, making a pretty good salary, who wondered if she should buy her own townhouse. But she's worried. Maybe the prices will continue to drop and she'll lose her investment. Maybe she'd be better off putting her savings in the stock market, rather than making a down payment. She wondered why the upfront costs were so high -- not just the down payment, but the mortgage fees and the lawyer's fee and the transfer taxes. And then, even after spending all that, she'll have to pay taxes and insurance and condo fees and maintenance fees.

On the other hand, she feels like she's "throwing away" over $1000 a month to rent her current place. She's not building any equity; plus, the people in her complex tend to be transient. She admits she'd feel more comfortable if her neighbors stuck around for a while and she could get to know them. She also feels that, while it's nice that she doesn't have to worry about upkeep, the landlord often cuts corners on maintenance with a "quick fix." Plus, she feels like she'd like to "put her own stamp" on a place -- decorate the kitchen the way she'd like it, rather than the way the landlord has it. And she yearns to have walls that have some color to them, instead of the institutional white that's exactly the same no matter what apartment she lives in.

After a decade when it was cheaper to rent (purple) than buy (blue), things have evened out

This woman does have some decisions to make. We all do. How important it is to to be able to fix up a place the way you want it? And how long do you plan to stay there? Are you going to get married -- or sign up for independent living -- and want to move within the next year or two? Are you settled into a job, or are you going to change jobs, or retire, and to want to move across country next year?

Above all, the choice of whether to rent or buy is a lifestyle decision. What kind of home and neighborhood you want to live in, and how long are you going to stay there.

The New York Times offers a calculator that compares the costs of renting or buying a home. You plug in the price of the property, along with the taxes and your down payment and your mortgage rate, and compare it to the rent you'd have to pay for the same place. But as with any calculator, you have to make certain assumptions, chiefly about how much the property will appreciate over the years, and how much the rent will rise over the same period. (Who, in 2006, would have entered negative10 percent a year for the expected appreciation?)

But, to me, any calculation fails to answer an obvious question. How could it possibly be cheaper to rent than to buy? Somebody owns that property. They're not going to rent it to you for less than what it costs them. Sure, there might be a temporary situation, where the owner is stuck, and the renter can take advantage of the situation. But in general, if the owner couldn't rent it for more than what it costs ... why would anyone own it in the first place? You wouldn't do that, any more than you'd take a job where to have to pay to work, rather than get paid to work.

I did the calculations for my old condo, which I sold in 2007, and which I know now happens to be for rent. If I assume that the value of the property will go up at 2 percent a year, and the rent would increase at the same rate, then the line crosses at the five year mark. If someone is going to move in there and stay for more than five years, it's cheaper to own than to rent.

In other words, the new rule of thumb isn't any different from the old rule of thumb. But I'd just twist it around. Don't buy a house, or a condo, unless you're going to stay there for at least five years.

You're exactly right to advise not buying if you're not planning to stay in a place for a long time. My sister is underwater with her condo in Seattle. She really wants to move back to L.A. But she's feeling stuck right now. She bought at the height of the market there in 2005.

She wishes, knowing what she knows now, that she had continued to rent.

On the other hand, my husband and I sold our L.A. home of 29 years when we retired (we were fortunate to sell it in two weeks to an all-cash buyer with a 30 day escrow at a reasonable price) and bought a new one here in Arizona for less than half the price of the old one. We wanted to retire with no house payments and that has enabled us to live well on Social Security and a small pension. We spent ten years researching where to move, visiting the places, renting for two to three weeks at a time just to be sure that we were making the right choice for us. We feel very blessed and hope to stay in this house the rest of our lives.Some neighbors, however, didn't thoroughly research the pros and cons of living here -- like a couple who had no idea how hot it can get in the summer when they had visited only in the winter. So a decision to buy a retirement home, especially, needs to be done very carefully.

The problem with speaking of averages and other generalizations about the real estate market is overlooking the biggest factor affecting value which is location.

Extreme conditions in some areas distort the average. In any economic climate, there will be places where renting can be cheaper than owning and other areas where buying would be cheaper than renting. Just look at the Detroit area where you can buy a house for $1. That's certainly cheaper than rent.

From an investor's standpoint, single family homes generally do not generate great returns unless they are in a college town, so you're right on point with the rent v buy on a single family home. Investors will put money into apartment buildings because the operating costs (i.e. mortgage, taxes, insurance)are generally lower per unit. In addition, depreciation (paper loss) will give an investor an even greater yield.

"everyone told us, it was a good financial decision as well. The mortgage was tax deductible; your real-estate taxes were tax deductible; and over the years the value of your house would increase" - that sounds like a direct quote from a real estate salesperson. Never buy anything because it's tax deductible - even in a 35% tax bracket you're only saving 35 cents of every dollar. And you should run away as fast as possible from anyone who suggests a guarantee that a certain investment will always increase in value.

Years ago the mortgage industry that I worked for discovered when all things were considered, taxes, insurance,and repairs, it was cheaper to rent. However they never published those findings. It would have been counter productive. Real Estate people will give different statistics to encourage buying. Personally, I like knowing I can do as I wish with my property and try not to kick my butt when a big repair presents itself.You are right. It should depend on your goals.

We live in a resort area where the break down is about 50-50 full timers and second home owners. There was little activity the past three years. Suddenly a couple of old apartment buildings were sold and are being renovated and converted into condos. Single home renovations were non-existent the past few years - suddenly there is activity. I guess there is hope.

Housing prices in the Phoenix area are up about 10% from their all time low of late last year. That sounds great, but it still leaves the average home at 50% lower than it was in 2008. So, there is a long way to go.

Owning a home has been right for me for the last 35 years. But, the next move to a condo will be a rental. I have no idea how long it will be until I should be making the move to a continuing care community. So, I don't want to be stuck in a down market for sellers just when I need to move.

In our county of Arlington which is de facto part of the District of Columbia, the property values never diminished. Houses on the market around here go like hotcakes, especially as the gas prices have risen. As long as there are two of us, we don't intend to sell and/or move. We have lived in our house for 30 years, but could not afford to buy it today. Sheesh. Dianne

Your post and the comments do a fine job of covering just about every aspect of the question. The missing one is subjecting yourself to the rules (sometimes whims) of a Homeowners Association, whether you are an owner or a renter. To me, this is nearly as important as location and at least as important as cost.

We sold our condo in an association where everything outside the walls was regulated and bought a home where the association largely is limited to sponsoring some very nice social activities.

It's wonderful to have maximum independence in the way we use our property. Buyers or renters should carefully look into HOA restrictions before they make the big move.

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Deciding whether to rent or own a house would be easier if goals are set beforehand. Renting can be less of a stress because all you have to do is pay your monthly rent, but it can be limiting because you do not have control over some aspects like renovations and adjustments. That is why renting a house is good for someone who’s just starting to live an independent life, or for someone who just started a family. Buying a permanent residence is not an overnight decision, so renting a home can be a good start to prepare oneself for the financial and physical challenges of owning a house.

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About Me

I’m a Baby Boomer, part of the pig-in-a-python demographic group that has brought so many changes to America – and will continue to do so until we cash our last Social Security check. I had a typical baby boomer career. I attended college, went to business school, worked for several companies, then in my mid-50s was laid off. Meanwhile, I got divorced, and my two kids left for college. Now I live with my significant other, B, who has two children of her own. We live in the New York area, a convenient stopover for our four peripatetic 20-somethings. And I produce this blog Sightings Over Sixty which covers health, finance, retirement – concerns of people who realize that somehow they have grown up.